Retiree Medical Liabilities Fall

Companies may lose the savings they booked last year on retiree medical costs as Americans live longer and interest rates remain low.

Among the Fortune 1,000 companies, the combined liabilities for retiree medical benefits totaled $285 billion at the end of last year, down nearly 16% from 2012, according to benefits adviser Towers Watson & Co.

These obligations stem largely from long-ago promises to unionized employees. Most companies have shut their plans to new workers. In fact, only half of the companies studied continued to carry retiree medical liabilities on their balance sheets.

But unlike corporate pensions, companies aren’t usually required to fund these plans and generally pay the bills as they come in. More than two-thirds of companies with such plans haven’t set aside any funds to cover the expected future costs, according to the study. Only 19 companies had fully funded retiree medical plans.

Companies “don’t fund it because they don’t have to, but they do face some risks today by not funding,” said Mitchell Cole, a managing director at Towers Watson.

Liabilities shrunk last year mostly because the so-called discount rate used to value obligations rose with interest rates, Mr. Cole said. Interest rates have receded this year, so those obligations could mount again.

Some companies are finding ways to reduce their liabilities.

International Business Machines Corp., for example, removed some 110,000 Medicare-eligible retirees from its health plan at the end of last year, citing rising medical costs. Instead, IBM funds annual payments into a health retirement account so that the retirees can buy additional coverage on a health-insurance exchange.

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